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entitled 'Internal Revenue Service: Fiscal Year 2009 Budget Request and
Interim Performance Results of IRS's 2008 Tax Filing Season' which was
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Report to the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives:
United States Government Accountability Office:
GAO:
March 2008:
Internal Revenue Service:
Fiscal Year 2009 Budget Request and Interim Performance Results of
IRS's 2008 Tax Filing Season:
GAO-08-567:
GAO Highlights:
Highlights of GAO-08-567, a report to the Subcommittee on Oversight,
Committee on Ways and Means, House of Representatives.
Why GAO Did This Study:
The Internal Revenue Service (IRS) has ambitious goals to improve
enforcement, improve taxpayer service, increase research, and continue
investing in systems modernization. The Presidentís 2009 proposed
budget is a roadmap for how IRS intends to achieve these goals. IRSís
2008 filing season performance, along with the performance of paid
preparers who help taxpayers, is a key indicator of the tax systemís
impact on taxpayers.
GAO was asked to (1) assess how the budget request allocates resources
compared to prior years, (2) determine the status of systems
modernization efforts, (3) assess filing season performance, and (4)
assess IRSís ability to identify paid preparers. GAO compared the
budget request to prior years, updated our previous reporting, compared
IRSís filing season performance to prior years and goals, and
interviewed IRS officials.
What GAO Found:
The Presidentís fiscal year 2009 budget request of $11.4 billion for
IRS is 4.3 percent more than its 2008 enacted budget and includes
increases of 7 percent for enforcement and less than 1 percent for
taxpayer service. IRS is proposing a number of new enforcement
initiatives, and deserves to be commended for providing ROI analyses to
support them. Although the budget request for IRS provides performance
measure data, it does not provide ROI for programs or activities other
than the new initiatives. IRS included 16 legislative proposals and if
none is enacted, IRS would not need the associated $23 million in 2009.
Similarly, if IRS were to fall behind in its hiring efforts related to
its nonlegislative initiatives, not all the associated funding would be
needed for 2009.
The request for IRS systems modernization is more than $40 million less
than the fiscal year 2008 enacted amount. IRS said that the proposed
funding level will allow it to continue developing and delivering its
primary modernization projects, but it did not provide details on how
specific projects or benefits to taxpayers would be affected. Although
IRS has experienced significant management and technical weaknesses, it
has made progress and addressed some, but not all, of GAOís numerous
recommendations.
So far this filing season, IRS has processed 51.2 million income tax
returns and issued 46.5 million refunds worth $122.7 billion. Because
of increased call volume that IRS expects due to the recently passed
Economic Stimulus legislation, IRS is planning to shift hundreds of
collections staff to telephones with an estimated revenue loss of up to
$681 million.
Because of the lack of a single identification number, IRS has limited
ability to identify paid preparers. This complicates tax law
enforcement and limits IRSís ability to conduct research on how paid
tax preparers affect taxpayer compliance. According to IRS officials,
requiring a single identification number could improve the situation
but IRS has not analyzed the usefulness or cost of options to do so.
Funding for IRS Enforcement and Taxpayer Service Programs and Related
Support Functions, Fiscal Years 2006-2009:
[See PDF for image]
This figure is a vertical bar graph. The vertical axis of the graph
represents dollars in billions from 0 to 8. The horizontal axis of the
graph represents fiscal years 2006 to 2009. The following data is
depicted:
Fiscal year: 2006;
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year: 2007;
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year:
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year:
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $7.7 billion.
Source: GAO analysis of IRS data.
[End of figure]
What GAO Recommends:
GAO recommends that IRS extend return on investment (ROI) analyses to
major enforcement programs for future budget requests and develop a
plan to require a single identification number for paid preparers,
including the feasibility of options, their benefits and costs, and
usefulness for enforcement and research on paid preparer behavior. Due
to the short time frame for GAOís report, IRS officials said they were
unable to respond to our recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-567]. For more information, contact James
R. White at (202) 512-9110 or whitej@gao.gov.
[End of section]
Contents:
Letter:
Results:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Updated Slides from the February 29, 2008 Briefing:
Appendix III: GAO Contact and Staff Acknowledgments:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 13, 2008:
The Honorable John Lewis:
Chairman:
The Honorable Jim Ramstad:
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Financing of the federal government depends largely on the Internal
Revenue Service's (IRS) ability to effectively administer the tax laws.
The President has requested $11.4 billion in program dollars to fund
IRS's fiscal year (FY) 2009 operations, including $11.1 billion for
service to taxpayers and tax law enforcement. Although the exact mix is
unknown, effective tax administration requires a balance of service and
enforcement.
In response to congressional concerns, in 2007 IRS published strategies
for reducing the tax gap and improving taxpayer service.[Footnote 1]
IRS most recently estimated the net tax gap--the difference between the
taxes owed and eventually paid--at $290 billion in tax year 2001. The
tax gap strategy emphasized the need to address both intentional
evasion and unintentional taxpayer errors and recognized that
enforcement efforts should be combined with taxpayer service because
both affect compliance. The taxpayer service strategy--known as the
Taxpayer Assistance Blueprint--committed IRS to making decisions about
taxpayer services based on an understanding of taxpayers' needs,
preferences, and behaviors, as well as the cost of services, with the
goal of improving compliance. The two strategies, together with the
2009 budget request for IRS, emphasize that the foundation for
improving enforcement and service is (1) increased research on the
nature and causes of taxpayer noncompliance and how enforcement and
service affect compliance, and (2) continued investment in modernized
information systems, including IRS's Business Systems Modernization
(BSM) program. The budget is a roadmap for how IRS intends to allocate
resources in order to improve enforcement, improve taxpayer service,
increase research, and continue investing in modernized information
systems.
IRS provides much of its service to taxpayers during the annual tax
filing season, making filing season performance a key indicator of
overall performance. Two challenges for this year's filing season are
(1) the late passage of changes related to the alternative minimum tax
(AMT) and other tax laws, and (2) recent passage of the Economic
Stimulus Act of 2008.[Footnote 2] Both create additional, unanticipated
workload for IRS.
In addition to IRS, paid preparers provide service to many taxpayers;
preparers prepared 78 million returns, or 61 percent, during the 2006
filing season. In the past, we have documented problems and recommended
that the Commissioner of Internal Revenue conduct research to determine
the extent to which paid preparers live up to their responsibility to
file accurate and complete tax returns based on information they obtain
from their customers.
Based on your request, our objectives related to the President's
proposed budget for IRS were to (1) assess how the budget request
allocates resources for enforcement, service, research, and systems
modernization compared to prior years and the rationales for
differences, including for new initiatives; and (2) determine the
status of IRS's efforts to develop and implement its BSM program,
particularly its Customer Account Data Engine (CADE). Related to the
interim results of the filing season, our objectives were to assess
IRS's (1) development of a strategy to inform taxpayers about changes
in filing requirements due to recently enacted AMT legislation; (2)
performance compared to goals and prior years' performance, including
factors affecting performance; and (3) ability to identify paid
preparers and track their performance.
To meet these objectives, we did the following. We based our budget
work, in part, on comparisons of enacted and requested budgets for IRS,
reviews of other documents, and interviews with IRS officials. For our
BSM work, we relied primarily on our reviews of BSM expenditure plans.
We based our filing season work primarily on comparisons of IRS's
actions related to the AMT to best practices, performance to prior
years' and current goals, analysis of performance and other data, and
interviews with IRS officials. We used different time periods depending
on the available information. We conducted this performance audit from
December 2007 through March 2008 in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
For a more detailed discussion of our scope and methodology, see
appendix I.
Results:
On February 29, 2008, we briefed your staff on our preliminary
observations of our reviews of the 2009 budget request for IRS and 2008
filing season performance. This report transmits updated materials we
used at the briefing, which are reprinted in appendix II.
In summary, we made the following major points:
* The President's 2009 budget request for IRS of $11.4 billion is 4.3
percent more than the FY 2008 enacted budget and represents an increase
of 7 percent for enforcement and less than 1 percent for taxpayer
service, consistent with longer-term trends. The enforcement increase
reflects initiatives that address a small percentage of the $290
billion net tax gap. We have previously reported on 3 of 16 legislative
initiatives which are estimated to raise about $34 billion over 10
years. We have (1) suggested that Congress consider an idea for
reducing securities capital gains noncompliance, (2) supported the
notion that payments to corporations be reported on information
returns, and (3) described ways to mitigate the compliance costs of
proposals related to these information returns and to other information
returns associated with credit and debit card payments. If none of the
legislative initiatives is enacted, IRS would not need the associated
$23 million in 2009. Similarly, if IRS were to fall behind in its
hiring efforts related to its nonlegislative initiatives, not all the
associated funding would be needed for 2009. In general, we commend IRS
for including more information this year on its new initiatives and for
including return on investment (ROI) information for all new
nonlegislative initiatives. Although the budget request for IRS
provides performance measure data, it does not provide ROI for programs
or activities other than the new initiatives.
* The budget request for IRS's BSM was reduced by over $40 million from
last year's enacted amount. IRS said that the proposed funding level
will allow it to continue developing and delivering its primary
modernization projects, but it did not provide details on how plans to
deliver specific projects or benefits to taxpayers would be affected.
IRS's initial efforts to modernize its information systems encountered
significant management and technical weaknesses. IRS has made
significant progress in implementing management controls and
capabilities and addressing our recommendations in recent years.
However, some of our recommendations have not been fully addressed. For
example, we recently reported that IRS has yet to take certain actions
to address our recommendation to fully revisit the vision and strategy
for BSM, including developing long-term plans for completing the
program.[Footnote 3] In our report, we also noted, among other things,
that BSM project phases were not all completed on schedule and within
cost during 2007 and that future releases of CADE and Account
Management Services continue to face risks and challenges. Finally, we
recommended that IRS complete a plan with specific time frames for
implementing initiatives supporting its information technology human
capital strategy, and IRS agreed.
* IRS's efforts to develop a communication plan about delays in
processing certain AMT-affected returns adhered to many communication
strategy best practices. IRS began processing all AMT-affected returns
on February 11, 2008, about 4 weeks after the filing season began.
* IRS data show that, as of February 29, IRS processed 51.2 million
individual income tax returns (79 percent filed electronically) and
issued 46.5 million refunds worth $122.7 billion. IRS expects to
process more than 20 million returns due to the Economic Stimulus
legislation. IRS has achieved processing efficiencies, but we have
reported that IRS could achieve even more.[Footnote 4] Early in the
filing season, IRS's telephone performance was comparable to last year.
However, because of the anticipated increased call volume associated
with the recently passed Economic Stimulus package, IRS expects the
assistor level of service to drop from 82 percent down to 74 percent, a
level which will decrease taxpayers' ability to get through and speak
with an assistor. In addition, IRS has estimated the revenue foregone
by shifting hundreds of collection staff to answering taxpayer calls
about their economic stimulus checks to be $681 million.
* IRS faces limitations in identifying individual paid preparers and
monitoring their performance. Because they now prepare over 60 percent
of all individual income tax returns, paid preparers are a key part of
tax administration. IRS requires that paid preparers identify
themselves on all income tax returns they prepare by entering their
Social Security Number (SSN) or Preparer Tax Identification Number
(PTIN). If the preparer has a partnership or an employer, then the
preparer must also include the Employer Identification Number (EIN) of
the partnership or employer on the return, in conjunction with an SSN
or PTIN. However, according to IRS officials, many preparers do not
sign tax returns with the required identifying number or numbers.
Because processing returns is a priority for IRS, it accepts returns
even if preparers' information is not provided on returns. Because
preparers have the choice between two numbers and may be required to
use a third as well, IRS officials said that confusion is created for
preparers and IRS faces challenges in enforcing the signing
requirement. The limitations in identifying preparers complicate
enforcement because IRS cannot systemically match tax returns with
preparers in order to detect patterns of noncompliance. Furthermore,
IRS officials said this is an impediment to research on preparer
compliance, its causes, and possible solutions. Several IRS officials
with responsibility for preparer compliance said that requiring a
single identifying number could improve preparer compliance with
signing requirements, but that IRS has not evaluated the usefulness or
costs of implementing such a requirement.
Conclusions:
IRS should be commended for including ROI analyses of new initiatives
in the FY 2009 budget justification. Because IRS has ambitious plans to
improve enforcement, improve taxpayer service, increase research, and
continue investing in modernized information systems, resource
allocation decisions are more important than ever. Being able to make
resource allocation decisions, ROI analysis, even with its limitations,
could increase the chances that IRS's ambitious goals are met.
Because of the important role of paid preparers in administering the
U.S. tax system, better information about preparer behavior and their
contribution to taxpayer compliance could ultimately help reduce the
large tax gap. A first step toward better information would be
improving IRS's ability to identify paid preparers.
Recommendations for Executive Action:
We recommend that the Commissioner of Internal Revenue:
* extend the use of ROI in future budget proposals to include major
enforcement programs, and:
* develop a plan to require a single identification number for paid
preparers, including the feasibility of options, benefits and costs of
those options, as well as their usefulness for enforcement and research
on paid preparer behavior.
Agency Comments:
In commenting on a draft of this report, IRS officials said that, due
to the short time frame for GAO's report, they did not have time to
fully analyze the recommendations and, therefore, were unable to
respond to them at the time. They provided technical comments, and we
made those changes where appropriate.
We are sending copies of this report to the Chairmen and Ranking
Members of other Senate and House committees and subcommittees that
have appropriation, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Commissioner of Internal
Revenue, the Secretary of the Treasury, the Chairman of the IRS
Oversight Board, and the Director of the Office of Management and
Budget. Copies are also available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions or wish to discuss the material
in this report further, please contact me at (202) 512-9110 or at
whitej@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix III.
Signed by:
James R. White:
Director, Tax Issues:
Strategic Issues:
[End of section]
Appendix I: Scope and Methodology:
To assess the President's 2009 budget request for IRS, we reviewed
IRS's congressional budget justifications and supplementary documents
to (1) identify trends in spending and staffing from FYs 2006 through
2008, and (2) assess information on the tax gap and spending
initiatives to determine how they were justified. We based our
assessment on a comparative analysis of funding, reviews of
documentation, and interviews with IRS officials. Our analysis of the
BSM program was based primarily upon previous work and the results of
our detailed review of the FY 2008 BSM expenditure plan.
To assess IRS's filing season performance related to processing,
telephones, face-to-face assistance, and its Internet Web site, we
obtained and analyzed information on IRS's development of a
communication strategy for the AMT and determined how well it adhered
to communication best practices; performance and production data, which
we compared to annual goals and prior years' performance looking for
trends and the factors that significantly affected performance;
reviewed regulations, reports; and interviewed IRS officials.
Our filing season and budget audit work was done primarily at IRS's
National Office and its operating divisions, including the Large and
Mid-Size Business operating division in Washington, D.C; the Small
Business/Self-Employed operating division in New Carrollton, Md.; and
the Wage and Investment division operating division headquarters and
Joint Operations Center in Atlanta, Ga. We also interviewed officials
at the IRS Oversight Board in Washington, D.C. Additionally, we
reviewed relevant external documentation and our reports as well as
those of the Treasury Inspector General for Tax Administration.
We previously assessed IRS budget and filing season performance data
for reliability. For example, we considered filing season performance
measures and data that cover the quality, accessibility, and timeliness
of IRS's services to be objective and reliable based on that work.
Since the data sources and procedures for producing this year's budget
and filing season data have not significantly changed from prior years,
we determined that the data were sufficiently reliable for the purposes
of this report. To the extent possible, we corroborated information
from interviews with documentation and data and where not possible, we
report the information as attributed to IRS officials. We have
determined that the estimates for cost savings come from competent
sources and are reasonable. Data limitations are discussed where
appropriate.
We conducted this performance audit from December 2007 through March
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Updated Slides from the February 29, 2008 Briefing:
Fiscal Year 2009 Budget Request and Interim Performance Results of
IRSís 2008 Tax Filing Season:
Update to February 29, 2008 Briefing To the Subcommittee on Oversight,
House Committee on Ways and Means:
FY 2009 Budget Request ĖObjectives:
Our objectives were to:
* assess how the Presidentís budget request for IRS allocates resources
for enforcement, service, research, and systems modernization compared
to prior years and the rationales for differences, including for new
initiatives; and;
* determine the status of IRSís efforts to develop and implement its
Business Systems Modernization (BSM) program, particularly its Customer
Account Data Engine (CADE).
We based our budget work, in part, on comparisons of enacted and
requested budgets for IRS, reviews of other documents, and interviews
with IRS officials. We based our BSM work primarily on our reviews of
BSM expenditure plans.
Interim Results of IRSís 2008 Filing SeasonĖObjectives:
Our objectives were to assess IRSís:
* development of a strategy to inform taxpayers about changes in filing
requirements due to recently enacted tax law changes, including to the
alternative minimum tax (AMT);
* performance compared to goals and prior years' performance, including
factors that affect performance; and;
* ability to identify paid preparers and track their performance.
We based our work primarily on comparisons of IRSís actions related to
the AMT to best practices and of performance to prior yearsí and
current goals, analysis of performance and other data, and interviews
with IRS officials. We used different time periods depending on the
available information.
Budget Request and Interim Results of IRSís 2008 Filing SeasonĖResults
in Brief:
The Presidentís budget request for IRS of $11.4 billion is 4.3 percent
more than the FY 2008 enacted budget and shows an increase of 7 percent
for enforcement and less than 1 percent for taxpayer service.
All of IRSís nonlegislative initiatives show an anticipated return on
investment (ROI), and we commend IRS for this. ROI varied from $0.40 to
$11.40 on the dollar; to us, IRS justified resource allocations using
ROI and other factors, such as the need to provide examination
coverage.
IRS did not include such ROI information about other key elements of
its budget; doing so would provide decision makers with more
information about resource allocations.
We have previously reported on 3 of the 16 legislative initiatives that
are estimated to raise about $34 billion over 10 years.
* We have (1) suggested that Congress consider an idea for reducing
securities capital gains noncompliance, (2) supported the notion that
payments to corporations be reported on information returns, and (3)
described ways to mitigate the compliance costs related to these
information returns and to other information returns associated with
credit and debit card payments.
* If none of the legislative initiatives is enacted, IRS would not need
the associated $23 million in 2009.
Similarly, if IRS were to fall behind in its hiring efforts related to
its nonlegislative initiatives, not all the associated funding would be
needed for 2009.
For IRSís BSM program, the request is over $40 million less than last
yearís enacted amount. IRS told us that this funding level will allow
it to continue developing and delivering its modernization projects,
but it did not provide details on how its plans or benefits to
taxpayers would be affected.
Early results show that IRSís filing season performance is comparable
in some areas to last yearís. However, because of the anticipated
increased call volume associated with the recently passed Economic
Stimulus package, IRS expects to provide lower telephone service and
has begun shifting hundreds of collection staff to answering taxpayer
calls about their economic stimulus checks. IRS estimates the foregone
collections revenue due to this shift to be up to $681 million.
IRS faces limitations in identifying individual paid preparers and
monitoring their performance, a situation that can complicate
enforcement and research on preparer compliance, its causes, and
possible solutions. Several IRS officials said that requiring a single
identifying number could provide some benefits.
FY 2009 Budget Request-Overall Comparisons of Program Dollars:
Table 1: Request Compared to Last Yearís Enacted Budget:
Program: Taxpayer service;
FY 2008 (in thousands) enacted: $3,612,833;
FY 2009 (in thousands) requested: $3,636,230.
Percentage change: 0.6.
Program: Enforcement;
FY 2008 (in thousands) enacted: $6,997,226;
FY 2009 (in thousands) requested: $7,487,209;
Percentage change: 7.0.
Program: BSM;
FY 2008 (in thousands) enacted: $267,090;
FY 2009 (in thousands) requested: $222,664;
Percentage change: -16.6.
Program: Health insurance tax credit;
FY 2008 (in thousands) enacted: $15,235;
FY 2009 (in thousands) requested: $15,406;
Percentage change: 1.1.
Program: Total;
FY 2008 (in thousands) enacted: $10,892,384;
FY 2009 (in thousands) requested: $11,361,509;
Percentage change: 4.3.
Note: Dollar amounts include amounts for operations support.
Source: GAO analysis of IRS data.
[End of table]
FY 2009 Budget Request-Overall Comparisons of Full-Time Equivalents:
Table 2: IRS Full-Time Equivalents (FTE):
Appropriation: Taxpayer Service(see below);
FY 2008 enacted: 31,281;
FY 2009 requested: 30,792;
Percentage change: -1.4.
Appropriation: Enforcement(see below);
FY 2008 enacted: 47,349;
FY 2009 requested: 49,792;
Percentage change: 5.2.
Appropriation: Operations Support (see below):
FY 2008 enacted: 12,181;
FY 2009 requested: 11,989;
Percentage change: -1.6.
Appropriation: BSM:
FY 2008 enacted: 358;
FY 2009 requested: 333;
Percentage change: -7.0.
Appropriation: Health Insurance Tax Credit;
FY 2008 enacted: 17;
FY 2009 requested: 16;
Percentage change: -5.9.
Appropriation: Total;
FY 2008 enacted: 91,123;
FY 2009 requested: 92,922;
Percentage change: 2.0.
Percentage of staff that are managers or executives remained around 9
to 9.5 percent between FY 2006 and FY 2008.
Note: The decline in taxpayer services, including operations support,
reflects 91 FTEs in efficiency savings and 207 FTEs in electronic
filing savings. The increase in enforcement,including operations
support, includes 1,431 additional revenue agents and 582 extra revenue
officers.
Source: GAO analysis of IRS data.
[End of table]
FY 2009 Budget RequestĖJustification for New Initiatives:
Because of our recommendations from last year, IRS included more
information on new initiatives in the FY 2009 proposed budget.
* We commend IRS for including ROI measures and projections for all
nonlegislative new initiatives in its budget request.
* The budget request has explicit sections on initiative summary,
implementation plan, expected benefits, and ROI.
* IRSís ROI calculations have limitations that reflect the challenges
of estimating ROIs. For example, they do not include benefits of
improved voluntary compliance. For the research initiative, the ROI
does not measure the longer-term benefits of being able to develop
better strategies to combat noncompliance and reduce burden on
compliant taxpayers.
* Four of the five nonlegislative enforcement initiatives in FY 2009
were revisions of FY 2008 initiatives, with more total funds requested
and with generally more informative justifications than last year.
* ROI for FY 2011 varied from $0.40 to $11.40 on the dollar, and IRS
officials said elements beyond ROI, such as the need to provide
examination coverage to different segments of the taxpaying population,
factored into judgments about resource allocation.
A $51 million National Research Project (NRP) initiativeís ROI of $.40
per $1 applies only to research audits and, as already noted, does not
fully capture the initiativeís value. The request funds research
studies of the reporting compliance of taxpayers such as corporations
in order to develop more effective enforcement programs.
The National Research Programís ROI does not quantify:
* updates to IRSís system to target individual tax returns for
examination, intended to increase examination efficiency;
* updates to the tax gap estimate for corporations and partnerships,
for example; and;
* IRS and Treasury use of NRP data to identify compliance-related
legislative recommendations (e.g., securities sales basis reporting).
We are waiting for data from IRS to estimate the compliance benefits
from using the NRP results to update IRSís enforcement programs.
Hiring enough staff for the initiatives will be challenging for the
Large and Mid-Size Business (LMSB) and Small Business/Self-Employed
(SB/SE) divisions.
* For instance, the new initiatives call for adding 1,431 revenue
agents in addition to those who must be replaced through attrition, a
high number relative to past years.
* IRS divisions have previously hired large numbers of staff in a short
time due to specific budget initiatives, but officials reported that
hiring gradually over time would reduce challenges.
* If IRS were to fall behind in its hiring efforts, not all of the
associated funding would be needed for 2009.
FY 2009 Budget Request-Balance between Taxpayer Service and
Enforcement:
Figure 1: Comparison of Funding for Taxpayer Service versus
Enforcement:
[See PDF for image]
This figure is a vertical bar graph. The vertical axis of the graph
represents dollars in billions from 0 to 8. The horizontal axis of the
graph represents fiscal years 2006 to 2009. The following data is
depicted:
Fiscal year: 2006;
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year: 2007;
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year:
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $6.8 billion.
Fiscal year:
Taxpayer service: approximately $2.7 billion;
Enforcement: approximately $7.7 billion.
Source: GAO analysis of IRS data.
Enforcement increased 10.0 percent between FY 2006 and FY 2009.
Taxpayer assistance increased 3.7 percent between FY 2006 and FY 2009,
a decrease in real terms.
[End of figure]
Although the budget request for IRS provides performance measure data,
it does not provide ROI for programs or activities other than the new
initiatives.
* The Government Performance and Results Act of 1993 focuses on holding
federal agencies accountable for the results of federal spending and
aims for a clear link between the process of allocating resources and
the expected results to be achieved with those resources.
* ROI analyses provide a common measure for managers and Congress
helpful for making resource allocation decisions.
- Without measures such as ROI, IRS does not have a measure of program
results in comparable units that shows the trade-offs among alternative
allocations of resources.
Analytic data, such as ROI, can help answer questions such as the
following:
* Does increasing taxpayer service or enforcement have a more
significant effect on compliance?
* For taxpayer services, what are the implications, if any, of the fact
that it is significantly less expensive for IRS to interact with
taxpayers through the Internet or over the telephone than at walk-in
sites (as shown on slide 17)?
* For enforcement, what are the implications, if any, of the fact that
correspondence audits are sometimes more productive than field audits
(as shown on slide 18)?
Comparing the costs of various taxpayer service options helps decision
makers with funding choices.
Table 3: Cost of Providing Taxpayer Service:
Service: Answering tax law questions via e-mail;
Estimated cost-per-contact: $52.51.
Service: Providing assistance at walk-in sites;
Estimated cost-per-contact: $28.73.
Service: Answering correspondence;
Estimated cost-per-contact: $24.97.
Service: Providing assistance by assistors via toll-free telephones;
Estimated cost-per-contact: $19.46.
Service: Providing assistance through VITA sites;
Estimated cost-per-contact: $12.01.
Service: Providing assistance by automation via toll-free telephones;
Estimated cost-per-contact: $0.71.
Service: Providing assistance such as downloads and searches on IRS's
Web site;
Estimated cost-per-contact: $0.13.
Note: IRS reported that these estimates do not fully allocate all
indirect overhead and support costs. We have reported that because of
long-standing limitations in IRSís cost accounting capability, cost
data at this detailed level have not been audited (see, for example,
GAO-07-310 and 07-247). From our perspective, it would be important to
know more about the indirect and support costs to see if they might
significantly change the cost estimates.
Source: IRS data.
[End of table]
Table 4: Field versus Correspondence Audits, FY 2006:
Correspondence audits brought in more additional tax per return than
field audits for business nonfarm returns with total positive income
(TPI) of $100,000 or more.
Type and size of return: Total individual income tax returns;
Number of returns examined, field: 302, 785;
Number of returns examined, correspondence: 981,165;
Recommended additional tax (dollars in thousands), field: $5,433,084;
Recommended additional tax (dollars in thousands), correspondence:
$7,612,137;
Average recommended additional tax (dollars), field: $17,944;
Average recommended additional tax (dollars), correspondence: $7,758.
Type and size of return: Nonbusiness returns with TPI of $100,000 or
more;
Number of returns examined, field: 56,717;
Number of returns examined, correspondence: 110,122;
Recommended additional tax (dollars in thousands), field: $3,115,679;
Recommended additional tax (dollars in thousands), correspondence:
$3,514,184;
Average recommended additional tax (dollars), field: $54,934;
Average recommended additional tax (dollars), correspondence: $31,912.
Type and size of return: Business nonfarm returns with TPI of $100,000
or more;
Number of returns examined, field: 54,716;
Number of returns examined, correspondence: 34,515;
Recommended additional tax (dollars in thousands), field: $1,410,954;
Recommended additional tax (dollars in thousands), correspondence:
$961,681;
Average recommended additional tax (dollars), field: $25,787;
Average recommended additional tax (dollars), correspondence: $27,863.
Source: IRS data.
[End of table]
Developing ROI information beyond IRSís FY 2009 new initiatives will be
a challenge.
* IRS recognizes that additional research may be needed to provide data
for ROI analyses.
* Developing ROI estimates for taxpayer service is a particular
challenge because of a lack of data on the impact of taxpayer service
on compliance.
* IRSís Taxpayer Assistance Blueprint includes a proposal to conduct
research with the goal of measuring the ROI for taxpayer service.
FY 2009 Budget RequestĖEnforcement Increase:
The FY 2009 enforcement increase reflects initiatives that address a
small percentage of the $290 billion net tax gap.
The budget request for IRS includes five nonlegislative enforcement
initiatives that would cost about $338 million in FY 2009 and are
expected to raise about $2 billion of direct revenue annually starting
in 2011.
* The amount of indirect revenue from changes in voluntary compliance
is harder to measure than the direct revenue effects of IRSís
enforcement programs, but the budget request says ďit is estimated to
be at leastĒ $6 billion annually as a result of deterring
noncompliance.
* Examination coverage for corporations with assets of $10 million or
more will increase from a planned 6.6 percent for FY 2008 to 6.8percent
for FY 2009, which was the actual FY 2007 percentage, and to 7.59
percent and 7.32 percent for FYs 2010 and 2011, respectively.
The budget request shows that 16 legislative initiatives budgeted at
$23 million for FY 2009 would raise about $36 billion in revenue over
10 years; if none is enacted, IRS would not need the $23 million.
* Twelve of the 16 legislative initiatives remain from the FY 2008
proposed budget.
* Three of the 16 would raise about $34 billion of the $36 billion over
10 years; for various reasons this is more than the administrationís FY
2008 estimate of about $27 billion for similar proposals.
We have reported on three proposals:
* In 2006 we suggested that Congress consider an idea for reducing
securities capital gains noncompliance.
* In 1991 we supported the notion that payments to corporations be
reported on information returns.
* In 2007 we described ways to mitigate the compliance costs related to
these information returns and to other information returns associated
with credit and debit card payments.
FY 2009 Budget RequestĖSpecific Taxpayer Service Decreases:
The FY 2009 budget request for IRS does not include any taxpayer
service initiatives that increase 2009 funds over the 2008 enacted
amount.
* IRS officials told us they expect the number of tax returns prepared
by IRS taxpayer assistance centers to increase despite a $31 million
reduction in funding for the category covering these centers and
outreach; they said that the number of returns would not decline
because much of the $31 million in 2008 was being used for long-term
investments that would not be duplicated in 2009.
* A $7.7 million decrease in funding for the Taxpayer Advocate is
designed to offset an unexpected funding increase in FY 2008 that is
being used to lower the Advocateís outstanding caseload.
The $8 million reduction in Volunteer Income Tax Assistance (VITA)
resulted from the $8 million provided in FY 2008 for 2 years not being
used in 2008 and still being available through FY 2009.
* Since the program being funded--providing matching grants to
volunteer tax preparer organizations--was ramping up in 2008 to be
operational in 2009, another $8 million was not needed for
2009;according to IRS officials, the $8 million was not used in 2008
because it only became available after the filing season.
* IRS is expecting to see large, but unquantified, growth in VITA
returns.
* There were 11,922 VITA and Tax Counseling for the Elderly sites with
76,000 volunteers in FY 2007.
FY 2009 Budget RequestĖBackground on BSM:
As previously noted, the budget for the BSM program was significantly
reduced from the enacted FY 2008 budget.
Table 5: BSM Funding Differences, FYs 2008 and 2009 (in thousands):
Project: Customer Account Data Engine;
FY 2008 enacted: $58,500;
FY 2009 budget request: $58,800.
Project: Accounts Management Services;
FY 2008 enacted: $28,983;
FY 2009 budget request: $26,158.
Project: Modernized e-File;
FY 2008 enacted: $55,802;
FY 2009 budget request: $25,000.
Project: Filing & Payment Compliance;
FY 2008 enacted: 0;
FY 2009 budget request: 0.
Project: Core Infrastructure;
FY 2008 enacted: $39,150;
FY 2009 budget request: $32,000.
Project: Architecture, Integration, and Management;
FY 2008 enacted: $35,100;
FY 2009 budget request: $35,000.
Project: Management Reserve;
FY 2008 enacted: $4,310;
FY 2009 budget request: $2,300.
Project: Subtotal capital investments;
FY 2008 enacted: $221,845;
FY 2009 budget request: $179,258.
Project: BSM labor;
FY 2008 enacted: $44,000;
FY 2009 budget request: $42,052.
Project: Subtotal program request;
FY 2008 enacted: $265,845;
FY 2009 budget request: $221,310.
Project: Maintaining current levels;
FY 2008 enacted: $1,245;
FY 2009 budget request: $1,354.
Project: Total BSM budget request;
FY 2008 enacted: $267,090;
FY 2009 budget request: $222,664.
Source: IRS data.
[End of table]
IRSís BSM program was initiated in 1999. It involves the development
and delivery of a number of modernized tax administration, internal
management, and core infrastructure projects that are intended to
provide improved and expanded service to taxpayers as well as IRS
internal business efficiencies.
To date, about $2.3 billion has been appropriated for BSM.
The budget request for IRSís BSM was reduced by over $40 million from
last yearís enacted amount. When we asked about the impact of this
reduction on its operations, IRS told us that the proposed funding
level will allow it to continue developing and delivering its primary
modernization projects, but did not provide details on how plans to
deliver specific projects or benefits to taxpayers would be affected.
FY 2009 Budget Request-BSM Projects:
Key tax administration systems include:
* Customer Account Data Engine (CADE)--Intended to replace the
Individual Master File (IMF) and allow daily transaction processing
rather than current weekly batch processing provided from current IMF.
- CADE has demonstrated potential to significantly improve service to
taxpayers through streamlined and more efficient processing. Direct
deposit refunds 3.5 days faster and paper refunds up to 7 days faster
than legacy system.
* Account Management Services (AMS)--Intended to allow IRS employees
and taxpayers to access, validate, and update taxpayer accounts on
demand.
- As an initial step, AMS allows IRS customer service representatives
to perform on-line address changes to CADE accounts.
* Modernized e-File (MeF)--Allows electronic filing of many business
returns. Plan for providing future capability for electronic filing of
virtually all returns.
- Provides electronic filing of federal and state tax forms, including
for large corporations and tax-exempt organizations; over 2.2 million
returns/extensions have been accepted since launch. Accepts large
attachments in Portable Document Format (PDF), thus eliminating the
need for separate submission by mail. Has successfully processed large
partnership forms with over 500,000 documents.
FY 2009 Budget Request-BSM Challenges:
IRSís initial efforts to modernize its systems had significant
management and technical weaknesses and, as a result, projects were
routinely experiencing cost increases and schedule delays.
The seriousness of these weaknesses led us to place the modernization
program on our high-risk list in 1995.
We review the program regularly as part of our BSM expenditure plan
reviews and have noted that IRS has made significant progress in
implementing management controls and capabilities and addressing our
recommendations in recent years.
FY 2009 Budget Request-BSM 2008 Expenditure Plan Findings:
However, some of our recommendations have not yet been fully addressed.
For example, in our review of IRSís BSM expenditure plan for FY 2008,
we reported that IRS:
* was still not performing post-implementation reviews on its projects,
and;
* had yet to take certain actions to address our recommendations to
fully revisit the vision and strategy for BSM, including developing
long-term plans for completing the program.
We also noted that:
* project phases were not all completed on schedule and within cost
during 2007, and;
* future releases of CADE and AMS continue to face risks and
challenges.
We recommended that IRS complete a plan with specific time frames for
implementing initiatives supporting its IT human capital strategy, and
IRS agreed.
Interim Results of IRSís 2008 Filing SeasonĖAlternative Minimum Tax
Processing Delays:
IRSís efforts to develop a communication plan about delays in
processing certain AMT-affected returns adhered to many communication
strategy best practices.
IRS updated some systems and processed a majority of returns including
many AMT-affected returns, without any processing delays.
IRS began processing all AMT-affected returns on February 11, about 4
weeks after the filing season began.
Many taxpayers facing AMT-affected processing delays did not file a
return until after February 11.
A small number (74,000) of electronically filed returns were rejected
because they could not be processed before February 11 due to AMT.
Interim Results of IRSís 2008 Filing SeasonĖReturns Processing:
The volume of returns processed and refunds issued and IRSís processing
performance are comparable to last year. According to IRS data,as of
February 29, IRS:
* processed 51.2 million individual income tax returns, with nearly 79
percent filed electronically. The volume of electronically filed
returns is up 6.2 percent over last year; and;
* issued 46.5 million refunds, worth $122.7 billion, with 81 percent
being directly deposited into taxpayersí accounts (up 6 percent over
last year).
As of February 28, 2.5 million returns were processed through the Free
File Program, up 12 percent from last year. IRS does not allow
financial products, such as Refund Anticipation Loans (RALs), to be
offered through the Free File Program.
IRS expects more than 20 million returns to be processed in 2008, due
to the requirements of the economic stimulus program (in addition to
the more than 130 million returns processed in a normal year).
Figure 2: Number of Individual Income Tax Returns and IRS Staff Years
for Individual Paper and Electronic Processing, FYs 1999Ė2009:
[See PDF for image]
This figure is a combination line and stacked vertical bar graph. The
left vertical axis of the graph represents staff years from 0 to 5,000.
The right vertical axis of the graph represents individual tax returns
(in millions) from 0 to 120. The horizontal axis of the graph
represents fiscal years from 1999 to 2009. The following data is
depicted (numerical values are approximated from the graph):
Fiscal year: 1999;
Staff years devoted to paper filing: 4,300;
Staff years devoted to electronic filing: 300;
Paper returns processed (in millions): 4,000;
Electronic returns processed (in millions): 1,200
Fiscal year: 2000;
Staff years devoted to paper filing: 4,100;
Staff years devoted to electronic filing: 300;
Paper returns processed (in millions): 3,900;
Electronic returns processed (in millions): 1,500.
Fiscal year: 2001;
Staff years devoted to paper filing: 4,300;
Staff years devoted to electronic filing: 300;
Paper returns processed (in millions): 3,800;
Electronic returns processed (in millions): 1,700.
Fiscal year: 2002;
Staff years devoted to paper filing: 4,200;
Staff years devoted to electronic filing: 300;
Paper returns processed (in millions): 3,500;
Electronic returns processed (in millions): 2,000.
Fiscal year: 2003;
Staff years devoted to paper filing: 3,700;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 3,500;
Electronic returns processed (in millions): 2,300.
Fiscal year: 2004;
Staff years devoted to paper filing: 3,500;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 3,000;
Electronic returns processed (in millions): 2,500.
Fiscal year: 2005;
Staff years devoted to paper filing: 3,100;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 2,900;
Electronic returns processed (in millions): 2,900.
Fiscal year: 2006;
Staff years devoted to paper filing: 2,900;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 2,700;
Electronic returns processed (in millions): 3,100.
Fiscal year: 2007;
Staff years devoted to paper filing: 2,800;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 2,500;
Electronic returns processed (in millions): 3,400.
Fiscal year: 2008 (IRS projections of staff years and individual tax
returns);
Staff years devoted to paper filing: 2,400;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 3,500;
Electronic returns processed (in millions): 2,200.
Fiscal year: (IRS projections of staff years and individual tax
returns);
Staff years devoted to paper filing: 2,400;
Staff years devoted to electronic filing: 200;
Paper returns processed (in millions): 3,800;
Electronic returns processed (in millions): 2,000.
Source: GAO analysis of IRS data.
[End of table]
Interim Results of IRSís 2008 Filing Season-Increasing Efficiencies in
Returns Processing:
Compared to paper returns, electronic filing:
* Reduces IRSís costs by reducing staff devoted to processing. In 2007,
IRS used 1,811 (39 percent) fewer staff years for processing tax
returns than in 1999 for savings estimated by IRS to be $85 million.
* Improves service to taxpayers because of more accurate returns and
faster refunds.
As of March 5, 14.3 million returns were posted to CADE with nearly the
same number of refunds totaling $23 billion. Because CADE processes
returns and refunds more quickly, it can help minimize the need for
RALs and the high interest rates associated with these short-term
loans.
While IRS has achieved efficiencies, in large part, from increases in
electronic filing, in prior reports we have said that IRS could achieve
additional efficiencies by:
* mandating electronic filing for paid preparers who file a certain
number of returns and/or mandating bar coding for paper returns
prepared on a computer, and;
* transcribing all information from the remaining paper tax returns.
Doing the above would make all tax return information available
electronically for enforcement, which is not now the case.
Interim Results of IRSís 2008 Filing Season-Telephone Assistance:
Table 6: IRS Telephone Assistance Volume in the First Weeks of the
Filing Seasons, 2007 and 2008:
Telephone assistance: Total calls[A];
2007 actual: 16,027,716;
2008 actual: 15,378,372.
Telephone assistance: Answered by IRS assistors (percentage);
2007 actual: 6,538,436 (41%);
2008 actual: 6,295,549 (415).
Telephone assistance: Answered by automated menu of recordings
(percentage);
2007 actual: 9,489,280 (59%);
2008 actual: 9,082,823 (59%).
Source: GAO analysis of IRS data.
[A] Total calls (i.e., calls answered by assistors and automation) are
based on actual counts, from January 1 to February 24, 2007,and January
1 to February 23, 2008. FY 2007 Actual includes 241,880 TETR assistor
and automated calls answered.
[End of table]
Table 7: IRS Telephone Assistance Performance in the First Weeks of the
Filing Seasons, 2007 and 2008:
Telephone performance-access: Assistor level of service (percentage of
taxpayers who wanted to talk with an assistor and actually got through
and received service)[A];
2007 Actual: 80.9%;
2008 Actual: 78.6%;
2008 Plan (to date): 80.7%.
Telephone performance-access: Average speed of answer (number of
minutes spent waiting in queue to speak with an assistor)[A];
2007 Actual: 4.6;
2008 Actual: 5.7;
2008 Plan (to date): 4.8.
Telephone performance-access: Taxpayer disconnects (when taxpayer hangs
up while waiting on assistance)[A];
2007 Actual: 12.9%;
2008 Actual: 14.8%;
2008 Plan (to date): N/A.
Telephone performance-access: IRS disconnects (when IRS hangs up on a
taxpayer waiting on assistance)[A];
2007 Actual: 1.3%;
2008 Actual: 2.7%;
2008 Plan (to date): N/A.
Assistance Telephone performance-accuracy[B]: Accounts customer
accuracy rate estimates[C];
2007 Actual: 91.97%;
2008 Actual: 93.96%;
2008 Plan (to date): N/A.
Assistance Telephone performance-accuracy[B]: Tax law customer accuracy
rate estimates[C];
2007 Actual: 87.05%;
2008 Actual: 87.18%;
2008 Plan (to date): N/A.
Source: GAO analysis of IRS.
Note: N/A means that IRS did not set goals for these measures.
[A] Assistor level of service, average speed of answer, and taxpayer
and IRS disconnects are based on actual counts from January 1 to
February 24, 2007, and January 1 to February 23, 2008.
[B] According to IRS, these measures are based on a representative
sample estimated at the 90 percent confidence interval for January 2007
and 2008. The margin of error for the 2007 and 2008 estimates is less
than 2.4 percentage points.
[C] The percentage of calls in which telephone assistors provided
accurate answers for the call type and took the appropriate action.
[End of table]
IRS expects substantially increased telephone demand related to the
economic stimulus legislation.
IRS will be establishing a new automated line (1-866-234-2942) for
taxpayers with questions about stimulus payments. Taxpayers without a
filing requirement will hear a recorded message with the option to
route to an assistor.
Because of the increased demand, IRS expects its assistor level of
service to drop from 82 percent (the 2008 goal) down to 74 percentóthe
lowest level since 2002, depending on taxpayer behavior and IRSís
ability to steer them to other means of assistance and information.
This lower level would decrease taxpayersí ability to get through and
speak with an assistor.
IRS has begun shifting hundreds of Automated Collection System (ACS)
staff from collections work to answering taxpayer calls about their
economic stimulus checks.
IRS started sending economic stimulus notices to taxpayers the week of
March 3rd and needed additional phone staff that same week.
To accommodate the shift, IRS stopped sending out some ACS notices
several weeks ago.
IRS considered alternatives to ACS staff including contracting out,
using other IRS staff, or using Social Security Administration or other
federal staff but decided they were infeasible. For example,
contracting out was not feasible because of insufficient time to
negotiate the contract and conduct background checks and training.
IRS estimated that the revenue foregone by shifting ACS staff from
collections work to economic stimulus work to be up to $681 million.
Interim Results of IRSís 2008 Filing Season-Web Site Assistance:
Table 7: IRS Web Site Use for Filing Seasons 2007 and 2008:
Uses: Visits[A];
2007: 74,186,798;
2008: 82,612,754.
Uses: Downloads[B];
2007: 24,429,718;
2008: 24,842,830.
Uses: Searches[B];
2007: 20,248,240;
2008: 21,782,375.
Source: GAO analysis of IRS data.
[A] Web site visits are from January 1 to March 2, 2007, and January1
to March 1, 2008. A visit begins when a visitor views his or her first
page from the server IRS.gov, and ends when the visitor leaves the
site. Visits are not counts of the numbers of unique individuals who
have accessed the site.
[B] Web site downloads and searches are from January 2007 and 2008.
[End of table]
Interim Results of IRSís 2008 Filing Season-Face-to-Face Assistance:
Table 8: Assistance Provided at IRS Taxpayer Assistance Centers and
Volunteer Sites:
Return preparation contacts at IRS taxpayer assistance centers[A];
2007: NA;
2008: 85,604.
Returns prepared at volunteer sites[B]:
2007: 1,084,051;
2008: 1,119,307.
Source: GAO analysis of IRS data.
[A] IRS data for 2007 are not comparable to 2008, because IRS changed
how it counts numbers of returns being prepared at taxpayer assistance
centers from counting the number of returns prepared to counting the
number of taxpayers who returns they prepared. The time periods covered
are December 31, 2006 to February 24, 2007,and January 1, 2008 to
February 23, 2008.
[B] Returns prepared at volunteer sites from October 1, 2006 to March
4, 2007, and October 1, 2007 to March 3, 2008.
IRS is expecting increased demand at its taxpayer assistance centers
and volunteer sites, including VITA, as a result of the economic
stimulus legislation.
[End of table]
Interim Results of IRSís 2008 Filing Season-IRSís Ability to Identify
Paid Preparers:
IRS has limited ability to identify paid preparers and match them with
the returns they prepared.
Paid preparers prepared 78 million individual tax returns during the
2006 filing season, or 61 percent of all individual returns. Because
paid preparers assist the majority of taxpayers, they are a potentially
significant part of efforts to reduce taxpayer noncompliance and reduce
the tax gap.
IRS requires that paid preparers identify themselves on all income tax
returns they prepare by entering their Social Security Number (SSN) or
Preparer Tax Identification Number (PTIN). If the preparer has a
partnership or employment arrangement, then the preparer must also
include the Employer Identification Number (EIN) of the partnership or
employer on the return, in conjunction with an SSN or PTIN.
According to IRS officials, many preparers do not sign tax returns with
the required identifying number or numbers. However, because processing
returns is a priority for IRS, it accepts returns even if preparersí
information is not provided on returns.
Because preparers have the choice between two numbers and may be
required to use a third as well, IRS officials said that this creates
confusion for preparers and IRS faces challenges in enforcing the
signing requirement.
According to IRS officials, one possible improvement would be to
require a single identification number for each paid preparer. However,
these officials also noted that there would be a range of options, for
example, about how much data IRS would collect from preparers when
obtaining the number. IRS does not have estimates of the usefulness of
the various options or the costs of developing such a system.
The limitations in identifying preparers complicate enforcement because
IRS cannot systemically match tax returns with preparers in order to
detect patterns of noncompliance.
According to IRS officials:
* IRS obtains much information on paid preparers from audits of
taxpayers. Identifying problems with paid preparers through audits can
be labor intensive and complicated because it is difficult to identify
and track paid preparers this way.
* Without a single identification number, lists of returns prepared by
a particular preparer may be incomplete.
Early in last yearís filing season, IRS detected paid preparers filing
fraudulent telephone excise tax refund (TETR) claims. IRS:
* detected amounts over a threshold for the TETR claims made by
taxpayers;
* pulled those returns and identified patterns, such as many refunds
going to one address, using its Electronic Fraud Detection System
(EFDS);
* took action, including audits, to investigate these claims and
determined whether a paid preparer was involved, and;
* manually looked for patterns of fraudulent claims associated with
particular paid preparers.
Although labor intensive, IRS officials said that detecting TETR
related preparer fraud was easier than for many other types of
noncompliance because of the simplicity of determining useful
thresholds.
Beyond complicating enforcement, IRS officials said that the limited
ability to identify paid preparers is also an impediment for research
about the influence that paid preparers have on taxpayer compliance.
The Director of IRS Research noted that without an unduplicated count
of return preparers it is difficult to do research on how different
types of paid preparers contribute to taxpayer noncompliance or engage
in fraud themselves.
Without such research about paid tax preparers, IRS is less able to
understand the influence that paid preparers have on taxpayer behavior
and is less able to target outreach, education and enforcement efforts
on problem preparers.
Conclusions:
IRS should be commended for including ROI analyses of new initiatives
in the FY 2009 budget justification. Because IRS has ambitious plans to
improve enforcement, improve taxpayer service, increase research, and
continue investing in modernized information systems, resource
allocation decisions are more important than ever. Being able to make
resource allocation decisions, based in part on ROI analysis, even with
its limitations, could increase the chances that IRSís ambitious goals
are met.
Because of the important role of paid preparers in administering the
U.S. tax system, better information about preparer behavior and their
contribution to taxpayer compliance could ultimately help reduce the
large tax gap. A first step toward better information would be
improving IRSís ability to identify paid preparers.
Recommendations:
The Commissioner of Internal Revenue should:
* extend the use of ROI in future budget proposals to include major
enforcement programs, and;
* develop a plan to require a single identification number for paid
preparers, including the feasibility of options, benefits and costs of
those options, as well as their usefulness for enforcement and research
on paid preparer behavior.
Agency Comments:
In commenting on a draft of this report, IRS officials said that, due
to the short time frame for GAOís report, they did not have time to
fully analyze the recommendations and, therefore, were unable to
respond to them at the time. They provided technical comments, and we
made those changes where appropriate.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110 or whitej@gao.gov:
Staff Acknowledgments:
In addition to the contact person named above, Shea W. Bader, Crystal
M. Bernard, Michael Brostek, James Cook, John H. Davis, Carlos E. Diz,
Sarah A. Farkas, Charles R. Fox, Leon H. Green, Brent Greene, Carol M.
Henn, Robyn T. Howard, Lawrence M. Korb, David Lewis, Paul B.
Middleton, Karen V. O'Conor, Sabine R. Paul, Cheryl M. Peterson, Neil
A. Pinney, Jesus Ramoz, and Joanna M. Stamatiades made key
contributions to this report.
[End of section]
Footnotes:
[1] IRS, Reducing the Federal Tax Gap (Washington, D.C.: Aug. 2, 2007);
and IRS, The 2007 Taxpayer Assistance Blueprint (Washington, D.C.:
2007).
[2] Pub. L. No. 110-166 (2007) and Pub. L. No. 110-185 (2008).
[3] GAO, Business Systems Modernization: Internal Revenue Service's
Fiscal Year 2008 Expenditure Plan, GAO-08-420 (Washington, D.C.: Mar.
7, 2008).
[4] GAO, Tax Administration: 2007 Filing Season Continues Trend of
Improvement, but Opportunities to Reduce Costs and Increase Tax
Compliance Should Be Evaluated, GAO-08-38 (Washington, D.C.: Nov.15,
2007).
[End of section]
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To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: